The Exchange of Value
The existential question for every organization, regardless of the sector it is in, is how to create value. It is their reason for being. The farmers who grow our food, the carpenter, family-run corner stores, community businesses, and multinational corporations all deliver value in unique ways. So do governments and charities. In every exchange of value consumers seek to maximize the value they receive. Providers compete to create value in new ways or to provide it at a lower cost.
The economic system is a rich tapestry of interlinked value chains, where every chain is a sequence of steps required to produce a finished product or service. The value an organization creates dictates its role and position in the chain. All of these chains together create a value web that links the entire economy. Every product or service is embedded in something else. Value is determined not only by the products and services an organization provides, but also where and how.
The value web is similar to the food webs that link species in ecosystems.
Food web in a reef ecosystem. Source:
Pacific Island Fisheries Science Center, NOAA.
As in nature, new opportunities emerge. Every participant in the economy needs to meet the constantly changing and evolving needs of others.
Immediate payment may be made when value is exchanged, but frequently it is not. Governments cover their costs through taxes and are accountable to citizens for results. The social sector is funded by subsidies and donations, and delivers value in the form of social impact.
In their book Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers, Alexander Osterwalder and Yves Pigneur describe multiple dimensions of value. While originally written for use in business, these are applicable to any sector.
- Newness – satisfying an entirely new set of needs the consumer didn’t recognize and that didn’t exist previously
- Performance – creating products or services that are bigger, faster or better
- Customization – tailoring products or services to meet particular consumer needs
- Reliance – providing full service offerings that assure a job gets done while the consumer focuses on its own mission
- Design – offering designs that improve the consumer experience, or the usability of a product or service
- Brand – creating a strong and recognizable brand that enhances a consumer’s status or reputation
- Price – offering similar value at a lower price
- Cost reduction – providing products or services that help consumers reduce their own costs in creating value for others
- Risk reduction – reducing risks inherent in the use of a product or service
- Accessibility – making products or services available to consumers who previously were unable to access them
- Convenience – making products or services easier to use
Innovative organizations create novel value propositions competitors haven’t yet identified.
The Business Model
The business model is the genetic code that equips an organization to deliver value in unique ways. It determines how value is created and delivered. It defines the role an organization plays in the economy and its relationships with others. Osterwalder and Pigneur identified eight other elements of this business model DNA:
- Customer segments – classes of consumers whose particular needs are served by the organization’s products or services
- Channels – the way the organization connects with consumers
- Customer relationships – the nature of the relationship with consumers and how this affects their experience
- Revenue streams – how and what consumers pay for the organization’s products or services
- Key resources – physical, intellectual, human and financial assets required to make the business model work
- Key activities – activities required for the organization to function effectively
- Key partnerships – the supporting network of suppliers and partners
- Cost structure – costs incurred when the organization operates this way
Each of these elements applies just as well to government and social sector organizations. While the choices are infinite, the challenge is to find novel combinations that work. The uniqueness of the combinations creates the vast diversity we see around us.
Osterwalder and Pigneur developed the Business Model Canvas as a visual thinking tool for business model design. Using it as a framework ensures that all essential details are considered and integrated.
Alexander Osterwalder. “A better way to think about your business model.”
Source: Harvard Business Review. May 6, 2013.
Designing a business model is a creative process. We have to avoid the temptation to copy others, and we need to abandon our allegiance to the status quo to pursue new, radical ideas. While much of the economy is crowded and hyper-competitive, wide open spaces still welcome and reward pioneers.
Business Model Innovation
In Seizing the White Space: Business Model Innovation for Growth and Renewal innovation consultant Mark Johnson says organizations have three choices in the way they compete.
When they are well-adapted to serving existing customers using their existing business model, organizations can continue to focus on their core business. When adjacent opportunities arise, they can leverage the strength of the existing model to serve their existing customers in new ways, or to serve new customers. When opportunities cannot be addressed using an organization’s existing business model, it may choose to reinvent itself. Johnson calls this the “white space.” Reinvention, he says, is the prerequisite for long-term survival and growth.
The White Space. Source: Mark W. Johnson.
Seizing the White Space: Business Model Innovation for Growth and Renewal.
Many forces drive tectonic shifts in an industry. Three in particular create opportunities or imperatives for business model innovation, Johnson says:
- Unpredictable or radical shifts in market demand
- Discontinuous shifts in technology
- Dynamic shifts in government policy
These three forces often work in combination to produce radical dislocation and wrenching change.
When the stakes are high organizations need to be bold.
“Business model innovation efforts should be focused on the pursuit of something grand – changing the game in an existing market, creating a whole new market, transforming an entire industry. If leaders can’t succinctly articulate how a new business model will capture an opportunity for significant growth (or in the face of tectonic shifts become a powerful engine of company renewal), then white-space efforts or fundamental business change is unjustified.”
Notwithstanding what’s at stake, most organizations fail at business model innovation. Johnson cites a 2008 IBM survey where almost all of the eleven hundred CEOs who participated said their company needed to adapt its business model. However, only around 10 percent were actually investing in making the required change. In the end, few companies succeed. That may explain the shortened life expectancy of large companies. Business model innovation is now an imperative in every sector. Faced with accelerating change, organizations need to be built to transform.